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Summary

  • While these shares aren't cheap at a P/E of 17 compared to Wells Fargo's P/E of 11, the prospect of higher interest rates should spur Comerica with more revenue growth.
  • If management can show a drastic improvement to separate the bank from low-performing assets, Comerica will no longer be susceptible to weak interest rates.
  • Assuming the bank returns to 5% to 6% revenue growth rate, and sustained 4% to 5% growth in net income, fair market value points to $55 per share in the next twelve months.

With better-than-expected results coming in from Wells Fargo (NYSE:WFC) and JPMorgan (NYSE:JPM), it certainly looks as if the banking sector will be one of the bright spots amid an overall weak earnings season.

To that end, Comerica (NYSE:CMA), which has always been an underrated performer when compared to the big major banks is worth consideration. Not only has management positioned the bank for long-term growth, Comerica has above-average loan performance and expense controls has produced consistent year-over-year profitability.

While the bank has been assessed based on the metrics of Wells Fargo, Comerica fits more along the lines of Commerce Bancshares (NASDAQ:CBSH) and Bank of the Ozarks (NASDAQ:OZRK), two peers that it has outperformed from the standpoint of income acceleration.

While these shares aren't cheap at a P/E of 17 compared to Wells Fargo's P/E of 11, the prospect of higher interest rates should spur Comerica with more revenue growth. And from my vantage point, Comerica appears meaningfully undervalued ahead of its first quarter earnings report Tuesday.

The Street will be looking for earnings per share of 72 cents on revenue of $615.57 million. Earnings are expected to grow roughly 3% year over year, while revenue is expected to dip 10%. Analysts seem more optimistic about Comerica's prospects. EPS estimates has grown by 1 cent over the past 90 days.

For the fiscal year, analysts are looking for earnings of $3.02 per share, which should beat last year's earnings of $3.00. By contrast, analysts are looking for full-year revenue of $2.49 billion, which would be flat on a year-over-year basis.

As much as I like Comerica, the revenue struggles is nothing new. And nor is it unique to Comerica. Both Wells Fargo and JPMorgan have had their own setbacks with revenue, including in the most recent quarter.

In the case of Comerica, management has been able to offset the revenue issues with strong profitability. In fact, over the past four quarters, the bank has posted an average of 4% year-over-year growth in income, including a 26% jump in the third quarter. with income growing 26% from the year-ago quarter.

Tuesday, the management will look to extend that streak and affirm why investors believe the bank deserves the respect it has gotten over the past twelve months. Equally impressive has been the bank's ability to beat its quarterly estimates in areas like low credit costs.

And when you consider that Comerica has outperformed Wells Fargo and Citigroup (NYSE:C) in fee income growth, it makes sense that the bank carries the P/E that it does. This quarter, I want to see how well management deals with non-performing loans. This has been a challenge in the past.

And if management can show a drastic improvement to separate the bank from low-performing assets, Comerica will no longer be susceptible to weak interest rates. My bet is that management will do precisely that. And these shares should respond favorably.

As much credit management deserves for having navigated the weak interest rate environment, I would love this bank more if it were to rely less on its assets. Likewise, I want to see improvement in areas like net interest margin (the metric that explains how well management has utilized capital relative to the bank's debt situation).

For now, I remain encouraged by the bank's strong year-over-year improvement. Equally impressive, the bank still has several growth opportunities. Given that Comerica has roughly 10% of its loan booking to auto dealers, that's one example where it can continue to grow share, which should deliver more profits to Comerica's bottom line.

Finally it comes down to value. Comerica remains a top-notch bank with a growing presence in large markets like California and Texas. The Street already knows this. Again, the P/E of 17 suggests that growth is expected.

But at around $48 per share, the stock is trading a P/E that is 3 points lower on fiscal 2015 estimates. This is also 3 points lower than the industry average of 18.49. And assuming the bank returns to 5% to 6% revenue growth rate, and sustained 4% to 5% growth in net income, fair market value points to $55 per share in the next twelve months.

Source: Comerica Is Heading To $55